“Rich people have small TVs and big libraries, and poor people have small libraries and big TVs.” -Unknown
Being an undercover Finance Nerd, it seems that building wealth is a conversation that comes up often for me, whether it’s with my wife, friends, or even strangers in the checkout line at the grocery store.
Whether or not you find investing interesting, having a basic understanding of the topic can prove valuable to your long-term financial success. You likely have money goals that include becoming a millionaire, financial independence, or even achieving early retirement. Regardless of what your particular goal(s) are, investing is the primary vehicle to reach them.
Note: I am not a financial planner. As such all views expressed herein are a result of my personal experiences and not a guarantee of your financial success. This article is for informational purposes only and contains no affiliate links.
After I graduated college, I had no applicable knowledge on investing. I knew that if you put pennies in the piggybank, they would eventually start to add up. After I set some pretty extreme money goals, I started to research this big hairy beast called “investing.” I share my experiences below.
Investing is both different and similar to saving. Saving involves putting assets into a depository where you believe said assets are safe. Investing involves placing assets into a vehicle where your assets should increase in value over time (like a fine wine). Typically you have easier access to funds that are saved rather than invested.
What about Risk?
If you are thinking about investing, the first action item to acknowledge is that no investment is without risk- your investment will go up and it will go down. Leaving money in savings provides little to no risk, but exposes your money to inflation losses. For example the US inflation rate has risen as high as 4.1% in the past 5 years. This means that if I had $100 saved in 2010, I would still have $100 in 2016, however, my $100 would have the purchasing power of $91.30 in 2016 dollars. Thus, I would have lost $8.7% of my money due to inflation. As you expand this example out in terms of years and amounts, the losses due to inflation become huge!
When you invest, you are typically trying to beat inflation and take advantage of compound interest to increase the value of your investment beyond simply beating inflation. This sounds good, but it also has risk because as you may have seen recently, the stock market fluctuates. Other investments like houses can also decrease in value, (Remember 2008?) but typically increase long-term. Most investors try to diversify their investments to hedge against risk by seeking low/medium/high risk investments, more on that later. Keep in mind that investments are considered long-term. Taking money out of the vehicle when things get bad has made many a broke person.
Types of Investments
Bonds are any securities that are founded on debt from a company or government. You are basically loaning your investment money to this entity and they in turn pay you back with interest. This is typically a low risk investment with little potential return.
Stocks are where you purchase part of a company. You make money through the increase in value of your stock as well as potential dividends, or profits (although not common). The potential increase in value is greater than bonds, but the amount of risk is greater.
Mutual Funds are a group of stocks and bonds. When you invest in a mutual fund, you are essentially pooling your money with other investors which allows you to buy, as a group, a variety of investments. Typically, mutual funds include both stocks and bonds and the funds are managed by a professional manager. With your investment spread around different securities, mutual funds can be a safer alternative to purchasing single stocks, however they still fluctuate with the market.
Real Estate is a common investment vehicle for many people. Most houses not only retain their value, but also increase in value over time. Buying a house is a low risk way to invest money, but the increase in value depends largely on the particular market you purchase in. As we witnessed in 2008, home values can decrease, but tend to have a net increase over time. Investment real estate is another option to build wealth. Some investors flip houses, or purchase residential or commercial real estate. These investments can beat the stock market but are not without risk.
Options, Futures, Gold, etc. are typically high-risk/high-reward and often require knowledge and training beyond what the above investment vehicles require. As such, we will not discuss these options further in this article.
So how do I get Started?
Before you start investing, it’s always VERY important to make sure you’re out of debt. If you owe money, you are paying interest, and this will negate the growth that comes with your investments. We have an awesome article dedicated to getting out of debt here.
It’s also important to have a cash (in the bank) disaster fund before investing. If you start investing without the disaster fund, and Murphy’s Law pops up, you will have to take money out of investments to pay for the emergency. Learn about starting a disaster fund here.
Now that you’ve paid off all your debt and started a disaster fund, the first key to investing is diversification. You’ve probably heard the adage “don’t put all your eggs in one basket.” Well this is very accurate in the investment world. If say you place all your investments in one single stock, your entire future financial success depends on how well that single company performs. If they go under, so do you. That’s why everyone in the financial community recommends diversifying your portfolio by investing in more than one thing.
The first place you should probably invest is with your employer’s retirement plan. If your company offers a match, it’s important to invest as much as they will match as it’s effectively free money. Most companies offer a 401k which lets your invest a portion of your paycheck before taxes get taken out.
How does the Drunk Millionaire Invest?
We are a two income family, so we both invest in our company’s 401k plans. Mr. Drunk Millionaire has a company match of 6% so he contributes 6% for a total of 12% invested in the 401k plan through Fidelity. Mrs. Drunk Millionaire also gets a 2% match so she effectively invests 4% into her 401k. We select mostly medium-high risk mutual funds within the 401k’s that don’t include bonds as we are very young and can take on the risk with the potential for great returns.
We also are in the process of buying a house. We saved up for a sizable down payment, so we will invest those cash funds into the house. We plan to post an entire article on this process soon. We plan to fix it up, so that when we sell it, we will make even more money on our investment. Currently, we invest around 30% of our income into our house.
We also invest in Index funds (The Schwab S&P 500). Index funds are a subset of mutual funds, but are not professionally managed and also lack the fees that other mutual funds contain. We invest about 2% of our income in the S&P 500.
Recently we started to experiment with Betterment. Betterment is an online software company through which you can invest in index funds, specifically Vanguard funds. Instead of managing your own index funds, they add automatic portfolio rebalancing and tax loss harvesting at a relatively low cost. I’m not going to recommend Betterment until after we experiment with it for the next 6 months to determine its value, so more on that later. Currently we invest 2% of our income with Betterment.
We plan to add Roth IRAs for both the Mr. and Mrs. in 2016, so more on that later.
Not including the house, we invest around 20% of our income currently. At 25 and 26, we have set the goal of investing this large portion of our income so that we can gain financial freedom and have the option to retire early (at 40)! This goal was birthed after reading an article posted by Budgets are Sexy. A breakdown of our investments, as a percentage of income, are listed below:
What is your investment strategy? What are your big, hairy goals related to investing? Share below in the comments!